Helping Prevent Foreclosures

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CreditCreditThe New York Times

By Lisa Prevost

Aug. 14, 2014

A new study finds that the emergency extensions of unemployment benefits during the recession went a long way toward preventing mortgage defaults, even more than government programs meant to prevent foreclosures by focusing only on reducing monthly payments. Researchers from the Federal Reserve Board of Governors, in Washington, and the Kellogg School of Management, at Northwestern University, estimate that between July 2008 and December 2012, the $250 billion paid out in federally funded unemployment benefits helped prevent an estimated 1.4 million foreclosures.

The averted foreclosures saved $70 billion in social costs, which include the cost of foreclosure transactions to the lender and borrower, property depreciation and declines in neighboring property values.

“That’s a meaningful amount you’re getting back in social benefits,” said Brian Melzer, an assistant professor of finance at Northwestern and a co-author of the study.

The unemployment insurance system is a joint federal-state program, so benefit levels vary across the country. During the recession, Congress temporarily authorized federal funding to enable states to continue paying unemployed workers who had exhausted regular benefits. Benefit amounts and duration depended in part on states’ unemployment rates.

The study found that the states that increased their benefit levels the most showed larger declines in mortgage delinquencies. A $3,600 difference in maximum regular benefits reduced the average mortgage delinquencies associated with layoffs by 15 percent, Mr. Melzer said.

The mitigating effect was limited to low- to middle-income households, which are more sensitive to the generosity of unemployment benefits.

Significantly, the lower levels of default also held true for beneficiaries who owed considerably more than their house was worth. Mr. Melzer called that finding “striking” given concerns that such households are more likely to “strategically default” — that is, stop paying on purpose.

The study’s findings also strengthen the case for foreclosure-prevention programs that enhance a borrower’s ability to pay. One such idea was pitched early in the recession by researchers from the Federal Reserve Bank of Boston and the Board of Governors but went nowhere. It called for providing homeowners at high risk of default — those who are both unemployed and underwater — with government loans or grants to help cover their mortgages.

In contrast, during the recession the Obama administration’s Home Affordable Modification Program, known as HAMP, only lowered monthly payments, which is not a solution for homeowners with significant income disruption and is a more costly way of preventing defaults, said Morris A. Davis, the academic director of the Center for Real Estate Studies at Rutgers Business School and a former advocate of the government loan proposal.

As of 2013, HAMP had prevented an estimated 800,000 foreclosures, far short of its goals, according to Mr. Melzer.

Mr. Davis noted that unemployment benefits alone are not enough to prevent defaults in most cases. His data shows that in New York, for example, the maximum monthly benefit in 2009 was $1,620, while the average mortgage payment for unemployed homeowners was $1,738.

Chris Edwards, the director of tax policy studies for the Cato Institute, a libertarian think tank, said that while unemployment benefits may have prevented some foreclosures, the gains still have to be weighed against all costs. These include the overall tax burden resulting from the emergency benefit payouts and the economic impact of beneficiaries’ decreased incentive to get back to work quickly.